Daily Newsletter, Wednesday, 8/26/2009

Table of Contents

Market Wrap

A Yawn, Despite Good News from Housing and Durables

by Judy Alster

Stocks just lounged around Wednesday, despite seemingly hopeful reports for housing and durable goods orders. Caution seems to be reigning after the heavy buying that sent stocks up over 40% since March. Investors, still remembering the pain and not wishing to tread too heavily on what may turn out to be thin ice, are apparently wondering whether the market can climb much higher in the absence of rock-solid evidence of economic growth. They seem to have already baked a housing recovery, much of it Federal-tax-credit driven, into their buy plans, while the capital goods orders were heavy on transportation, thanks to the Cash for Clunkers program. Take it for all in all, Wall Street should have stayed in bed:

MARKET INDEXES, WEDNESDAY, AUG. 26:

Declines in many industrial and material stocks were a drag on the market with commodities prices mostly flat. The long rally in commodities prices that started earlier this year has been comatose of late, partly on concerns of falling demand from China. Prices keep bumping their heads on the ceiling:

COMMODITIES:

On the New York Stock Exchange, decliners outnumbered advancers by a fraction; on the Nasdaq, advancers had a slight lead.

DOW JONES INDUSTRIAL AVERAGE:

S&P500:

NASDAQ:

A big drawdown in gasoline stocks -- they fell 1.7 million barrels last week -- caused a fast $1 jump in oil prices, but even that fell back as investors digested the fact that demand is down 0.3% year over year. Crude inventories were up 200,000, and other distillates rose a bit as well, according to the Energy Information Administration's weekly report. The drop in gasoline reflects that refineries are operating at a just-okay 84.1% of capacity. October crude dropped 58 cents to settle at $71.47, in a chart that looks like the one for commodities:

CRUDE PRICE:

As for the $39-billion 5-year Treasury note auction, demand was strong, with coverage (essentially that's bidder interest) at 2.51, above the long-term average. I guess the government isn't having much trouble financing its ballooning debt. Foreign and institutional investors took 56% of this issue, also not bad. The only negative of the sale from the government's point of view was that the yield came in a basis point above market expectations, at 2.494%. The yield on the benchmark 10-year Treasury note rose to 3.46% from 3.44% late Tuesday.

Incidentally, the yield curve is the flattest we've seen since the end of July, based on the difference between two- and 10-year yields. (Quick refresher: A normal yield curve shows that yields rise as maturities lengthen. The yield curve flattens when all maturities have similar yields. It tends to accompany uncertainty about the economy.)

5-YEAR TREASURY NOTES:

New home sales jumped a satisfying 9.6% in July, rising for the fourth straight month at the best clip since September of last year. On top of that, they beat expectations. The Commerce Department said sales rose to a seasonally adjusted annual rate (SAAR) 433,000 from an upwardly revised 395,000 or 9.1% in June; expectations were 390,000. Sales are now up more than 30% from the bottom in January, but are still 'way off from the fantasy-land peak of four years ago. And do we really want to see that kind of bubble again so soon?

The median sales price of $210,100, however, was off 11.5% from 2008 and down slightly from $221,400 in June. Well, at least they're selling, with sales gains concentrated in the South.

Last month's sales pace was the strongest since September. However, it's being pushed along by the tailwind of a federal tax credit that covers 10% of the home price, or up to $8,000, for first-time owners. Home sales must be completed by the end of November for buyers to qualify, so we might expect a slowdown after that. Builders and real estate agents are pressing Congress for the credit to be extended. Gee, ya' think they'll listen?

YAHOO RESIDENTIAL CONSTRUCTION INDEX, WEDNESDAY:

There were a mere 271,000 new homes for sale at the end of July, down from 280,000 in June. At the current sales rate, that represents 7.5 months of supply -- down from June's 8.5 months, the lowest since April 2007 and a real good sign, as this interesting self-explanatory months-of-inventory graph from calculatedrisk.com shows:

HOUSING INVENTORY IN AND OUT OF RECESSIONS:

Assuming this is real trend and not a tax-credit fluke, it could make builders more confident about moving along on new projects. That would lead to more jobs in the construction industry as well as to an increase in manufacturing orders for building supplies, which would translate into more jobs in those industries (and probably rising commodity prices). "These are crucial elements of a sustainable recovery," says the chief economist at Nomura Securities, which nobody can deny. Every new home built creates, on average, the equivalent of three jobs lasting one year and generates about $90,000 in taxes paid to local and federal authorities, according to the admittedly-not-disinterested National Association of Home Builders, but they're probably not far off the mark. Homebuilders' stocks are rising, and so is some housing infrastructure, like this wood-products company:

LOUISIANA-PACIFIC:

Shares of homebuilders were up for the second day. Other gainers in homebuilding and materials were Hovnanian Enterprises (HOV), up 9.4%; Standard Pacific (SPF), up 7.8%; D.R. Horton (DHI), up 5.6%, Beazer Homes (BZH), up 4.9% and Brazil's Gafisa, up 4.9%.

The Mortgage Bankers' Association's purchase index rose 1% last week, mainly on increased demand for government loans. It was the fourth straight jump for the longest streak since March. Since the mortgage purchase index can be assumed to lead new home sales, today's encouraging home sales reports shouldn't have been a pure surprise. Mortgage rates moved higher in the week with 30-year loans up 9 basis points to an average 5.24%, but even so it didn't slow things down. The refinance index rose 12.7% for a third straight gain.

In other decent news, the Census Bureau reported that total new orders for manufactured durable goods (the high-ticket ones you expect to last more than three years) increased $7.8 billion or 4.9% in July to $168.4 billion. It was the third increase in the last four months (June fell 1.3%), and the largest percentage increase since July 2007. New nondefense orders for capital goods jumped $4.6 billion or 8.6% to $57.5 billion; new defense orders were up $1.3 billion or 14.8% to $9.8 billion. Excluding the 18.4% increase in transportation goods, orders rose 0.8 percent, which was shy of analysts' expectations.

It was a surge in aircraft bookings and a jump in July auto orders -- undoubtedly nudged up by the elegantly-named Cash for Clunkers program that generated a reported 700,000 new-car sales -- that drove the increase. But even excluding the nudge from transportation, the 0.8% rise was the largest increase in two years. Excluding defense, orders were up 4.3%.

Capital goods orders were very good, up 9.5% following a 5.7% drop in June. The big gainers? Primary metals, fabricated metals, computers & electronics, communication equipment, and even electrical equipment in a hint of improving construction demand. Machinery orders did fall substantially but couldn't make a dent into the capital goods reading.

COMMUNICATIONS EQUIPMENT:

Not only orders, but shipments rose, up $3.5 billion or 2% to $173.1 billion, after a 0.7-percent June increase. Inventories of manufactured durable goods, which we always like to see fall, were down for the seventh consecutive month, off $2.7 billion or 0.8% to $314.1 billion, following a decline in June of 1.5%. Like the fall in months of housing inventory, this tells us that manufacturers are getting their formerly-crowded shelves back in line with demand, which should boost economic growth in the second half of the year.

The strong report suggested that business spending on equipment may actually post an increase in the third quarter after plunging at a record 36% rate in the first quarter and dropping 9% in the second quarter.

So with all this you'd think the market would jump, but investors evidently want a little more proof of growth There was a little excitement after the home sales reports but after that, not much. Of course, late August is notorious for low volume, one reason, in addition to no more white shoes, to look forward to September.

Retailers moved a little after good earnings from Dollar Tree (DLTR) and Williams-Sonoma (WSM). Dollar Tree reported a higher-than-expected jump in quarterly profit and boosted its full-year sales and earnings forecast on a substantial increase in customer traffic in its stores. Long-time customers are shopping there more frequently and new customers, who in better times might have spurned a store that sells most of its merchandise for a buck, are walking right in. In a telling detail, customers are not only buying basic merchandise like food there, but also discretionary goods like books and party supplies. The stock is not selling for a buck:

DOLLAR TREE:

Home improvement retailers like Home Depot (HD) and Loew's (LOW) gained, not surprisingly, on the new home sales report.

On the other end of the retail spectrum, Williams-Sonoma, a very high-end home goods retailer into which I have been walking for years without ever buying anything for myself, reported second quarter earnings of five cents a share excluding one-time items, better than analyst estimates of a 9-cent loss. The careful reader will note this sentence: "Revenues were primarily driven by stronger than anticipated merchandise margins and ongoing cost containment initiatives." Revenue fell 18% year-over-year to $672.1 million, above consensus. The company says it expects a third quarter and year above analyst expectations. (They'll have to do it without me, alas.) The stock jumped $1.68 or 10.6% today, to $17.15.

And in our never-ending but probably loony search for infallible "buy" signals (I know there aren't any): A number of quite intelligent people like the "trinity" of the New York Stock Exchange Advance-Decline Line, the McClellan Summation Index, and the Nasdaq New Highs-New Lows (one or two other similar indicators can be substituted). When all three are lined up and doing what they should, it's okay to jump off the deep end, so they say, and maybe they're right. What the Nasdaq New Highs-News Lows Index should show is new highs exceeding new lows and trending above the 10-day average price. As this graph shows, we're not quite there yet.

NASDAQ NEW HIGHS-NEW LOWS INDEX:

Still, other signals, like the bottom head-and-shoulders formation we looked at last week tell us it's probably okay to dip a few toes back into the pool lest we lose all the upside.

And as regards this week's Silly Graph, I guess I'm as much to blame as anybody. I refer, of course, to the price of cookies, cakes and cupcakes -- kept high, obviously, by unrelenting demand.

U.S. CITY AVERAGE PRICE of CAKES, CUPCAKEs AND COOKIES:

Tomorrow brings earnings for a number of companies including some late-reporting foreign firms like Accor, Avis Europe, China Sunergy, China Telecom, Royal Bank of Canada, The Nine, Ltd. and Vimpel Communications. In economic reports, stand by for Gross Domestic Product and Jobless Claims. They could be market movers.

New Option Plays

Oil Services Bounce

by James Brown

Why We Like It:
Yesterday oil stocks looked pretty ugly with oil's sharp reversal under $75.00. Investors were quick to buy the dip this morning. More aggressive traders might want to consider buying calls on OXY now. I'd rather look for a pull back into the $72.00-70.00 zone and buy calls there. If we are triggered at $72.00 our first target is $77.00. Our second target is $79.85.

In Play Updates and Reviews

Machinery Play Now Open

by James Brown

Today's market dip was enough to trigger one of our bullish candidates.

CALL Play Updates

Apple Inc. - AAPL - close: 167.41 change: -1.99 stop: 163.40

AAPL dipped toward its 10-dma and managed to bounce at $166.76. That was almost enough of a dip to hit our trigger at $166.50. As it stands now we're still on the sidelines waiting for AAPL to pull back so we can buy calls.

I am suggesting readers buy calls (small positions only, 1/2 to 1/4 our normal trade) on a dip at $166.50. We'll use a tight stop loss at $163.40. More aggressive traders can use a stop loss under $160 and the August low of $159.42. If we are triggered at $166.50 our first target to take profits is at $174.00. Our second target is $179.00. FYI: The P&F chart points to a $231 target.

Picked on August xx at $ xx.xx

CF Industries - CF - close: 82.71 change: +0.52 stop: 79.75

The action in CF yesterday looked like a bearish engulfing (reversal) candlestick. The lack of follow through lower is good news for the bulls.

Currently our plan is to buy calls on a breakout over resistance with a trigger to launch positions at $85.25. If triggered at $85.25 our stop loss is at $79.75 and our first target is $89.85. Our second target is $97.50. My time frame is four to six weeks. FYI: A breakout over $85.00 would produce a new triple-top breakout buy signal on the Point & Figure chart.

Trading note: Investors should note that Agrium (AGU) has been trying to buy CF for months. CF has been trying to buy Terra Industries (TRA) for months. Nobody is selling because they claim the offers don't fully value the company (a.k.a. it's not enough money). There is potential upside if AGU finally makes a high enough offer or someone else steps in. There is potential downside if CF makes too high a bid for TRA and the market thinks they overpaid. This M&A merger dance hasn't affected the stock much lately but it is a risk either direction.

Picked on August xx at $ xx.xx

EOG Res. Inc. - EOG - close: 73.98 change: -0.43 stop: 69.90

Yesterday I lowered our trigger to buy calls from $74.00 down to $72.50. EOG gapped open lower at $73.75 and plunged to $72.65 before bouncing. Unfortunately, we're still on the sidelines here. The low today was very close to its exponential 200-dma (at 72.54). I am altering our entry point again with a suggestion to go ahead and buy calls on this bounce. I'm keeping the stop loss at $69.90. More conservative traders may want to raise theirs toward the 50-dma or the $72.00 level. Since we're using a more aggressive entry point I'd suggest trading small position sizes.

Our first target is $79.50. Our second target is $88.00. The daily chart is building an inverse H&S pattern that is forecasting a rally toward $100.

Chart:

Picked on August 26 at $ 73.98

FISERV Inc. - FISV - close: 49.46 change: -0.04 stop: 46.60

FISV is still hovering under round-number resistance at $50.00. I am expecting another dip toward the $48.50-48.00 zone.
Our first target to take profit is at $52.50. I'm setting a second target to exit completely at $54.00.

FLR is contracting. The stock should find support at its long-term trendline of higher lows. Look for an entry point and a bounce near $52.50. FLR has already hit our first target near $55.00. Our second and final target is $59.00.

Our play in FLS is now open. The stock dipped to $87.15. Our trigger to buy calls (small positions) was at $87.50. Our first target is $92.25. Our second target is $98.50. Our time frame is several weeks.

Railroad stocks weighed on the transportation sector. The railroad index lost 1.5%. GWR gave up 1.6%. I would expect a dip back toward $30.00 and its 10-dma. More conservative traders may want to raise their stops a bit.
I'm not suggesting new positions at this time. Our first target is $32.90. Our second target is $34.75.

GWW is still consolidating sideways under resistance at $90.00. We're waiting for a dip. The plan is to buy calls at $86.50.
Our first target is $93.50.

Picked on August xx at $ xx.xx

Intl.Business Machines - IBM - cls: 119.47 change: +0.64 stop: 117.45

IBM almost hit our stop loss this morning. Shares spiked down to $117.51 and bounced. Volume was pretty light on the session. I am suggesting readers wait for a close over $120.00 or an intraday move over Monday's high before launching new call positions. Our first target is $124.50. Our second target is $129.00.

Picked on August 24 at $120.25
Change since picked: - 0.78
Earnings Date 10/08/09 (unconfirmed)
Average Daily Volume = 7.9 million
Listed on August 08, 2009

IDEXX Labs - IDXX - close: 51.06 change: -0.10 stop: 49.75

IDXX has failed at $52.00 for the second day in a row. At this time I'd wait for a rise over $52.00 before buying calls.

Currently our first target to take profits is at $54.90. Our second target is $58.00.

I am adjusting our entry point strategy on MTD. We'll lower our buy-the-dip entry from $86.00 to $85.25 and keep the stop loss at $83.95. We're going to add a breakout trigger to buy calls at $88.50 and we'll use a stop loss at $84.95. If triggered at $88.50 we want to use very small position sizes (about 1/4 our normal trade). If triggered our first target is $93.50. Our second target is $99.00. I am labeling this an aggressive play because volume is pretty light for this stock.

Picked on August xx at $ xx.xx

Newmarket Corp. - NEU - close: 85.05 change: -1.08 stop: 79.00

After two days of impressive gains NEU finally found some profit taking. We still have a trigger to buy the second half of our position on a dip at $80.50.

Our first target to take profits is at $88.50. Our second and final target is $92.50.

Picked on August 24 at $ 84.33

State Street (Bank) STT - close: 53.47 change: -0.76 stop: varies

There is no change from my prior comments. STT is still trading sideways in the $53.00-54.75 zone.

We have an aggressive breakout trigger at $55.60 and we'll use a stop loss at $51.45. Our first target is $59.80. This is an aggressive entry so I'm suggesting smaller position sizes at least 1/2 to 1/4 our normal trade.

We also have a buy the dip entry point at $52.00 with a stop loss at $48.90. Our first target is $55.00. Our second target is $59.80. Currently the Point & Figure chart is bullish with a $62 target.

Picked on August xx at $ xx.xx

U.S. Oil Fund - USO - close: 36.95 change: -0.22 stop: 33.99

The oil inventories came out this morning. Economists were expecting a drop in inventories and both the API and EIA reported a build. Oil sank on the news. The USO dipped to $36.57.

Our plan is to buy calls on the USO on a dip at $36.00. More conservative traders may want to wait for a dip closer to the trendline of higher lows and its 50-dma near $34.40. If triggered at $36.00 our first target to take profits is $39.75.

Picked on August xx at $ xx.xx

PUT Play Updates

First Solar - FSLR - close: 126.75 chg: -1.43 stop: 141.50

The oversold bounce in FSLR stalled a bit on Wednesday. Investors reacted to news that the company just lost its executive vice president John Carrington. FSLR and Carrington "mutually agreed" to end his employment effective Monday, August 24th.

I would still expect a bounce toward the 10-dma and possibly $140. More conservative traders may want to exit early than endure that kind of volatility. I am not suggesting new bearish positions at this time. FSLR has already hit our first target at $122.50. Our second and final target is $111.00.

This morning the failed rally at $39.00 looked like a new bearish entry point but there was no follow through. The intraday chart has MVL slowly inching higher. More conservative traders will want to seriously consider an early exit right now. I'd definitely wait for a drop under $38.00 before considering new put positions. Our target is $34.10.

The indicators are definitely mixed on SNDA. On a very short-term basis it looks like SNDA wants to bounce. Looking at a more intermediate time frame SNDA still has a pattern of lower highs and lower lows. I am lowering our stop loss to $50.25. I would hesitate to open new bearish positions here.
Our target is the $41.50-40.00 zone. Remember, SNDA is a volatile stock and readers may want to use smaller position sizes.

(What is a strangle? It's when a trader buys an out-of-the-money (OTM) call and an OTM put on the same stock. The strategy is neutral. You do not care what direction the stock moves as long as the move is big enough to make your investment profitable.)

Research In Motion - RIMM - close: 74.83 chg: -0.73 stop: n/a

RIMM is now testing the bottom trendline of its neutral triangle pattern. A breakdown from here would be pretty bearish. I would still open new strangle positions at current levels. We're suggesting a $73.50-76.50 entry zone. The closer to $75.00 the better. The options suggested were the September $80 calls (RFY-IP) and the September $70 puts (RFY-UN). Our estimated cost was $2.64. We want to sell if either option hits $6.00 or higher.